Combating the Hidden Costs of Free Shipping

by | May 30, 2018

3 min read

It’s been good business for online retailers and e-commerce brands to offer free shipping because it reduces cart abandonment at checkout while engendering customer loyalty and increased satisfaction.

In turn, companies spread the cost of shipping into the product price instead of relying on additional shipping charges.

Win-win, right?

Unfortunately, not necessarily.

Recent reports show that companies often lose in this scenario, particularly where it hurts: the bottom line.

It seems there are two primary reasons for the disconnect:

  1. Accounting for Cost of Goods Sold (COGS) is difficult and businesses underestimate full per-package expenses, including the accessorials and surcharges carriers like UPS and FedEx add to shipping rates after packages are manifested – a challenge certainly not unique to retailers, by the way.
  2. Along with “free shipping” also came “free returns.” While great for the customer satisfaction, the full cost of customer return habits aren’t effectively accounted for.

A medium-sized retailer can lose $200,000 in profit every week because of returns spurred by free shipping promotions, according to researchers, including Dartmouth University’s Scott Neslin.

The good news: there are solutions that can help your company be a free-shipping winner.

Know the Real Cost of Goods Sold

Crunching the numbers is a critical first step in knowing what each package you send (and perhaps see returned) will cost. A parcel intelligence platform, such as the VeriShip’s Logistics Intelligence, offers the key performance indicators and shipping profile data to make this manageable.

The team at prominent omnichannel lifestyle brand Kendra Scott relies on its parcel intelligence engine to identify, address, and prevent such challenges – which are highlighted in this success story.

Further, you can sync this data with your “single source of truth” systems – ERP, TMS, WMS, or CRM – for a holistic view.

Understand Return Trends to Create a Strategy

Offering free shipping may be more expensive than you think. In 2006, a study showed that 5.6% of online purchases were returned by customers. By 2013, the percentage had increased to an alarming 37%. It is critical for retailers to devise a return strategy based on clarity of shoppers’ return behaviors.

One carrier is trying to remedy these losses for their customers. Enter FedEx Returns Technology.

Recognizing the significant effect returns have on profits, FedEx launched Returns Technology in March 2018.

“Returns have rapidly evolved into a critical factor, second only to cost, in satisfying today’s e-commerce customers,” said Ryan Kelly, the Senior Vice President of FedEx Supply Chain. “FedEx Returns Technology bridges the gap between digital and physical, allowing merchants to define a returns strategy that works for their business model and for their customers.”

A medium-sized retailer can lose $200,000 in profit every week because of returns spurred by free shipping promotions.

A returns strategy that works gives retailers and ecommerce companies a way to offer free shipping – raking in the profits it guarantees – without increasing returns.

The end game of free shipping promos is one where companies strategically make calls using new innovations and technology.

One where customers still get that rush of scoring a great deal. Now we’re back to a win, win.

Anna is VeriShip’s Vice President of Business Development.

Topics: Shipping Data, Shipping Trends, Surcharges
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